Top Chinese firms face Canadian lawsuit over capital markets transactions

A pair of elite Chinese capital markets firms, Commerce & Finance and Jingtian & Gongcheng, are facing negligence and breach of duty claims filed by 11 international financial institutions, including Credit Suisse Securities and Banc of America Securities.

The statement of claim, seen by The Lawyer, was filed by 11 securities houses and financial institutions against the two Beijing-based firms in Ontario Superior Court of Justice on 31 May 2013. The damages sought in the case could amount to hundreds of millions of dollars or even billions.

The plaintiffs are Credit Suisse Securities (Canada), TD Securities, Dundee Securities, RBC Dominion Securities, Scotia Capital, CIBC World Markets, Merrill Lynch Canada, Canacoord Financial, Maison Placements Canada, Credit Suisse Securities (USA) and Merrill Lynch, Pierce, and Fenner & Smith Incorporated (successor by merger to Banc of America Securities).

Canadian firm Torys, led by the firm’s Toronto-based litigation partners John Fabello and Andrew Gray, are representing the plaintiffs.

It is one of the more recent claims filed in relation to the scandal-plagued Sino-Forest Corporation. The Chinese forestry company, worth $6bn, once traded on the Toronto Stock Exchange but collapsed following fraud allegations initiated by US short-selling firm Muddy Water in 2011.

The 11 companies are currently defendants of several class actions in Canada and in the US. The largest is a potential $9bn lawsuit filed by Canadian firms Siskinds and Koskie Minsky on behalf of burned investors in Sino-Forest against the company’s former auditors, consultants and underwriters.

The key allegations against these financial institutions in the class action, as well as their allegations against the two Chinese firms, arise from several fundraising transactions by Sino-Forest between 2007 and 2010, including both debt and equity offerings, that raised more than $2bn in all.

The 11 companies were the underwriters in these transactions. Jingtian & Gongcheng acted as the PRC legal counsel to Sino-Forest and Commerce & Finance acted as the PRC legal counsel to the underwriters.

The underwriters’ lawsuit against the Chinese firms claims contribution and indemnity for any liability they may have in the class action or other litigation in relation to Sino-Forest, and seeks damages from the Chinese firms to compensate the underwriters for any amounts they are ordered to pay in any of the litigation. It also pleads the court to treat this claim as a third-party claim within the class action.

It is understood that the two Chinese defendants are yet to file their statement of defence. Commerce & Finance did not respond to The Lawyer’s request for comments, while Jingtian & Gongcheng and Credit Suisse both declined to comment.

It is one of the very first cases in which well-established Chinese law firms are being pursued by global clients in such a high-profile and big-ticket matter. Read this week’s cover feature for an in-depth analysis on this case and its impact on capital markets practices in China.